Reporting by Mathew Carr
Oct. 31, 2023 — Global carbon markets are in trouble, just as the world needs them most.
Self doubt. Hesitating buyers. Scaled back retirements as holders seek flexibility … just in case there is better value coming.
“Buyers are cautious and getting increasingly so,” said Marisa Buchanan, Senior Vice President, Low Carbon Solutions – BP Trading & Shipping.
Carbon markets are making some progress, “but at the same time I worry that we are losing hearts and minds, especially when it comes to the voluntary carbon market,” Buchanan said Monday at the International Carbon Markets Summit in London held by City & Financial Global.
“Investors will invest when you have very clear rules of the road. Without a strong demand signal, you are not going to have investors who are willing to take long-term risks.”
While some compliance greenhouse gas markets, such as the EU program, are healthy, most aren’t. Mostly, polluters don’t pay to emit heat-trapping gas.
The voluntary markets are severely lopsided, with massive supply and few buyers, because global political leaders are unable or unwilling to agree a market structure that creates price tension by requiring corporations to buy.
I surveyed nine people familiar with the situation at the conference and afterwards and no one was confident that global leaders were getting their acts together on setting the needed market rules.
Politicians are blinded by fossil fuel money, said one.
He said genuine progress will probably require a massive climate disaster, which is severely depressing as well as reckless. Another participant said the industry mantra of buyers and sellers seeking to merely “survive until 2025” is becoming a deflating reality.
Those who bought a year ago at $8 or $9 are “looking a bit silly,” said a person. Many carbon prices are now below $2. “Now, it’s a waiting game,” they said.
Beyond my survey, several speakers called for regulation, including Bank of America’s Brett Orlando, Managing Director, Global Head of Commodity Transition at the bank.
Ingrid York, banking partner, White & Case, said she had never heard so many bank executives call for regulation.
Of the 30 million tons plus of voluntary carbon being offered on broker Emstream’s platform, about 21 million tons are spot and 10 million tons plus are futures. On the bidding side, there is sporadic need for a couple of million tons.
“A lot of people don’t want to post all the offers on the platform, because they don’t want to add to the weight,” said Melissa Lindsay, founder & CEO of the brokerage. “The amount of volume out there, yeah, it’s huge …and the buyers just come and they cherry pick,” she told the delegates.
“When they do want to buy, they come and they look through what’s there and they quite often shortlist, do some due diligence on projects and then take a decision. But, it’s incredibly slow. When we deal with end buyers [which is not often because the platform is for professionals], the question is just ‘why aren’t we buying the cheapest credit on your screen’? Then you are opening the Pandora’s box and you’re four weeks, five weeks explaining to them why they might not want to just buy the cheapest.”
I really hope Lindsay wasn’t too serious about the Pandora’s box comparison
According to Hesiod, when Prometheus stole fire from heaven, Zeus, the king of the gods, took vengeance by presenting Pandora to Prometheus’ brother Epimetheus. Pandora opened a jar left in her care containing sickness, death and many other unspecified evils which were then released into the world. Though she hastened to close the container, only one thing was left behind – usually translated as Hope, though it could also have the pessimistic meaning of “deceptive expectation“.
From this story has grown the idiom “to open a Pandora’s box”, meaning to do or start something that will cause many unforeseen problems. A modern, more colloquial equivalent is “to open a can of worms“.Wikipedia, emphasis added
“In the carbon markets you have so many people overcomplicating the solution,” Lindsay said. “There’s different standardised products and bundles coming out all the time and people are confusing benchmark pricing with products for consumers with hedging and risk-management tools. And all of those things need to be separate.”
Gordon Bennett, Managing Director, Utility Markets, ICE, invoked basic market theory to explain why market rules are needed to create a thriving marketplace — the problem is politicians are allowing free use of the atmosphere, so there is no scarcity, he said.
“Most people are consumers of liquidity,” Bennett said. “If you get 10 people in a room they tend to say ‘I’ll trade it when it’s liquid.’ If people do that, then nothing happens. Having liquidity providers is important. As an exchange infrastructure, we can do all the work, but ultimately we don’t have the gift of liquidity so you need buyers and sellers to express their view.”
ICE offered airline carbon futures known as Corsia on its exchange starting Oct. 9. Few are trading, so there are not many buyers and sellers willing to use their money to express their view.
Creating the required infrastructure for efficient carbon markets – trade, post-trade, financing, and data
Gordon Bennett, Managing Director, Utility Markets, ICE (far right)
Marisa Buchanan, Senior Vice President, Low Carbon Solutions – BP Trading & Shipping (second from left)
Dr Raúl Rosales, Senior Executive Fellow, Centre for Climate Finance and Investment, Imperial College Business School (far left)
Melissa Lindsay, Founder & CEO, Emstream & Emsurge (second from right)